U.S. firm’s fourth offer for large Australian natural gas, LNG producer

One of the largest private equity-backed energy deals in history inched closer to reality today, as Australia’s Santos (ticker: STO) opened its books to Harbour Energy Ltd.

The U.S.-based Harbour, a private energy firm backed by EIG Global Energy, is finally seeing its obvious determination and persistence pay off. Harbour says it is different from typical private equity backed companies in that it is funded with permanent capital and has the objective to build a global portfolio of successful, growing, long term oil & gas businesses.

Harbour’s first transaction was completed in 2017– the acquisition of a US$3.0 billion package of producing assets in the U.K. North Sea.

This is Harbour’s fourth offer for Santos in a little over six months

The current bid is the fourth unsolicited offer the company has made for Santos since August 2017. While Santos did not accept the offer, it did announce that it will engage further with Harbour and begin due diligence.

Santos is major natural gas producer

Santos is one of Australia’s preeminent natural gas producers, with assets throughout the country. The company has significant LNG holdings, and is the only Australian partner in Darwin LNG, where it works with ConocoPhillips, ENI, Inpex, Tokyo Electric and Tokyo Gas. The company expects to produce an average of about 157 MBOEPD in 2018, representing essentially flat production. Santos reports its origins were in the Cooper Basin dating back to the 1950s. The company claims to have one of the largest exploration and production acreage positions in Australia and infrastructure to go with it.

Debt will fund most of the offer

Harbour’s most recent bid amounted to US$4.70 per share in cash, plus a special dividend of US$0.28 per share that will be tax advantaged. This represents a premium of 28% to the company’s most recent closing price, and is 43% higher than Harbour’s first buyout offer.

Harbour plans to fund this acquisition primarily with debt, as J.P. Morgan and Morgan Stanley have provided an underwritten debt financing package of $7.75 billion.

Remaining funds will come from equity capital from companies like Mercuria Energy Group, one of the world’s largest integrated energy and commodity trading companies with offices across North America, Asia, the Middle East, Africa and Europe.

Regulatory scrutiny may be suffocating to getting a deal closed

According to Reuters, the biggest hurdle to the acquisition could be the Australian government. Natural gas is a highly politicized issue in Australia, where extensive LNG exporting led to a shortage of gas in the country in past years. Australia’s Foreign Investment Review Board will heavily scrutinize the deal, and according to Wood Mackenzie “Any buyer of Santos would need to be prepared for ongoing engagement with government and public scrutiny for many years going forward.”

Deal size is growing: this will be third-largest PE energy deal ever

This bid totals about $10.3 billion, making it one of the largest private equity-backed deals ever seen in the energy sector. According to Bloomberg, there have been only two larger PE deals in the energy business. In October 2016, Rosneft and United Capital Partners, a Russian investment fund, bought a 49% stake in India-based Essar Oil in a deal valued at $13 billion. The largest-ever deal was unveiled in September 2014, when Sinopec sold a $17.5 billion 29.99% stake in its marketing sector to a consortium of Chinese funds. The largest U.S. PE deal was completed in 2012, when funds managed by Apollo acquired EP Energy for $7.15 billion.

Harbour is led by 29-year Royal Dutch Shell natural gas and LNG veteran Linda Z. Cook as its managing director and CEO. Cook is also Chairman of Chrysaor, the privately held North Sea producer that bought a $3.8 billion package of UK North Sea assets from Shell in January 2017, making Chrysaor one of the largest UK oil and gas producers.